The Death of ROI?

By Patrick Gray

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The IT industry has long searched for a way to justify its cost, hunting for the perfect metric that shows the results of IT spending. Early in this quest, total cost of ownership (TCO) was flagged as the metric du jour. TCO provided a benchmark that indicated how much your IT was costing the company, and provided an easy way to compare IT spending choices.

Unfortunately, TCO focused on the utility aspect of IT, and put IT spending clearly in the camp of an ongoing cost, rather than an investment that could provide real returns to the corporation.

The obvious replacement for TCO was return on investment (ROI), the traditional financial benchmark that indicates how much money resulted from a particular investment. This was the perfect metric for IT spending that had a very well-defined and easily measured result, but runs into trouble for “soft” returns.

By way of example, a salesman could take $5,000 and put it into a savings account earning 2%. After a year, he would have $100 to show for his investment. Alternatively, he could buy a $5,000 suit. If he closes a $5M sale while wearing his new suit, what portion of the $5M was due to the suit?

IT spending runs into a similar quandary, since few projects are based solely on obvious financial returns. So, how do we value the “softer side” of IT results?

While there are complex financial machinations that can be used to determine the financial value of things like “goodwill" we need not delve into such complexities for IT spending rather we must seek to quantify the inherent value, both tangible and intangible in our IT spending.

To do so, I recommend the following four step process:

Start with clearly defined objectives. IT projects are often twisted into becoming all things to all people. Concrete objectives that are universally accepted are not just a great project management tool, they also comprise the basis for valuing IT spending.

Each objective should have a corresponding measure and a target for that measure. The measure may be cut-and-dried. For example if a current transaction takes 10 seconds and costs $10, one can likely assume the transaction costs $1/second and any reduction will have a corresponding cost savings. Even the intangible should have some measure. An objective like “increase customer satisfaction” can be measured by surveys. A “more effective sales force” could be measured through changes in the size of sale, or the time to close a sale.

Each measure should have an associated value. Again, this is easy for the “hard” metrics and will require some approximation for softer metrics. Even for the more intangible, there should be a way of putting a value on each measurement or that measurement is likely ineffective. If you cannot tie some value to the measurement, you likely have an unachievable objective or a poorly selected metric.

These measures can also be used to track a project’s process, and identify areas of concern before they spiral out of control. With defined objectives, appropriate measurements and a value tied to each, the potential value of the IT investment becomes increasingly clear. However, there is one critical element that is often ignored.

Like any investment, risk must be taken into consideration. Generally, the higher the risk, the higher the corresponding returns. Determining the risk factor for your IT investment serves three critical purposes. First, it provides a “sanity check” of the overall investment. If there is very high risk and very little value generated by that risk, the investment should be rethought or scrapped.

Second, it helps ensure the investment fits into your overall IT strategy. Too many high-risk projects spells potential disaster. Consistent spending on extremely safe projects might leave the door open to competitors. Finally, being forced to quantify risk helps identify potential pitfalls, and develop appropriate countermeasures.

Completing these four steps in concert with the rest of your organization helps develop agreement around what a particular IT investment should accomplish, how its progress can be measured, and what the value to the business should be. Understanding the risk of the investment ensures it fits in with the overall IT and corporate strategy and improves the understanding of potential pitfalls.

When the value of the project is presented in concert with its risk profile, IT spending is no longer a game of fuzzy math or a list of immeasurable benefits and assurances from the CIO to just “trust us on this one.” This aligns IT with other corporate investment decisions, where ROI is rarely predictable and intangibles must also have some representative value.

Patrick Gray is the founder and president of Prevoyance Group, located in Harrison, NY. Prevoyance Group provides strategic IT consulting services. Past clients include Gillette, Pitney Bowes, OfficeMax and several other Fortune 500 and 1000 companies. Patrick can be reached at patrick.gray@prevoyancegroup.com.